South Africa

South Africa is by far the most diversified economy in Southern Africa. Its diversification clearly influences the trend of the sub region as shown in Figure 14. Sector contribution to the country’s GDP is more or less evenly spread among agriculture, manufacturing, trade, transport and communications, finance and real estate. An analysis of these sectors in clusters shows that the economy is heavily concentrated in the service sector which contributes as much as 73% to GDP. Industry and agriculture contribute about 20% and 7%, respectively. The South African economy is, therefore, biased towards services and production activities at the higher levels of the value chain.

Further evidence of its diversification status can be deduced from its low export product and low market product concentrations. Platinum as the main export product contributes only 9% to total exports whilst diamonds, the number two export product makes up 5.3% of total exports. The total number of export products making up 75% of the country’s total exports stands at about 83; higher than any country in the sub region. As for export market concentration, China, the top export partner absorbs only 10.3% of total exports whilst the second placed export partner, the United States of America, takes up only 9.19% of the country’s total exports. This means that the top two export partners take up about 20% of the country’s total exports.

The country’s strategy for diversification has been defined by differences in areas of emphasis at different times in the historical development of the country. The early stages of diversification in the 1950s and 1960s attempted to achieve horizontal diversification by increasing the number of agricultural products that the country produced. This has made South Africa self sufficient in virtually any agricultural product. Among the agricultural products that are grown and exported are avocados, grapefruit, plums, tangerine, pears, grapes, maize, apricots, pineapples and from livestock meat, hides and skins. The country also developed forestry and fisheries as part of achieving a wider economic base within the agricultural sector. South Africa has, therefore, the most diversified agricultural sector within the sub region.

Developments in farming were paralleled by similar horizontal developments in the mining sector which have made South Africa a leading mining country in the world. It is abundantly endowed with mineral resources which account for substantial portions of world production and reserves. The country has over the years diversified its mining activities into precious metals and minerals, energy minerals, non ferrous metals and minerals, ferrous metals and minerals and industrial minerals. Mining activities which started with the discovery of gold, diamonds and coal have turned South Africa into one of the main producers and exporters of platinum, palladium, gold, diamonds, chrome, manganese, vanadium titanium and vari-ous base metals and coal. As with agriculture, South Africa has managed to develop the most diversified mining sector in the sub region.

Traditionally, agricultural based processing and mining processing form the first attempts at promot-ing vertical diversification. Agricultural processpromot-ing has lead to South Africa becompromot-ing one of the major producers and exporters of sugar, dairy products such as milk and cheese, beverages and wines. On the mining side, it has developed world class processing facilities from which such products like carbon steel, stainless steel, aluminium and jewellery are produced both for the local and export markets. For over a century, the mining industry in South Africa has provided the basis for developing other industries sup-portive of financial services, energy, water services; engineering services geological services, metallurgical services and so forth.

The country’s diversification process has gone through a number of stages starting with horizontal diversifica-tion in agriculture and mining and then followed by vertical diversificadiversifica-tion in the form of agricultural and mineral processing. Further beneficiation has been the basis on which it has built its diversified manufac-turing base comprising automobile, chemicals, ICT and electronics, metals, textile, clothing and footwear.

South Africa’s processing industry and beneficiation have also emerged from the import substitution period which the country adopted in response to the economic sanctions of the 1960s and 1970s arising from the country’s policies of apartheid. But the country’s commitment to appropriate industrial policies, trade policies, financial sector policies and macroeconomic policies has contributed to South Africa remarkable progress. Within the framework of horizontal and vertical diversification and implementation of import substitution policies and appropriate sector specific and macroeconomic policies, South Africa has emerged within SADC as the most competitive economy ranked 45 in the world out of 113 countries according to the 2009 Global competitiveness index. The major drivers of the impressive diversification process have been;

Creation of institutions to support diversification: This has been the traditional route through which government has driven diversification. Government has been central to the creation of critical economic management institutions that have been the driving force for economic diversification. Between the 1950s and 1960s, government established Phoskor for the purpose of producing phosphates needed to develop the agricultural sector. Sasol was also created to meet the energy needs of the country through the produc-tion of oil from coal. The Industrial Development Corporaproduc-tion (IDC), in turn, was established to provide finance to new industries. For the past sixty years or so IDC has financed rural projects that encourage employment creation, Small and Medium Enterprises (SMEs), emerging technology based institutions and new industrial development zones. To support the continuous development of the manufacturing sector, IDC has financed activities that encourage beneficiation of mineral and agricultural commodities.

Trade financing extended to exporters and importers has assisted the trade sector to expand and make the country a leading force in the region. Institutions created after 1990 with the view to facilitating diversifi-cation are the South African Bureau of Standards, the Council for Scientific and Industrial Research and the African Renaissance Fund which is meant to support bi lateral and tri lateral partnerships. In 2007 the National Industrial Policy Framework (NIPF) was created with the mandate to implement the Industrial Policy Action Plan (IPAP). Subsequently, government created the National Planning Commission which was tasked with dealing with such shortcomings in the implementation of the IPAP like concerns over the appropriateness of IPAP sectors, sustainability in the absence of protection, international competitiveness and infrastructural deficiencies.

Design and implementation of appropriate policies: The second role of government has been that of establishing policies appropriate to diversification and ensuring that they are implemented. The IPAP’s is one such policy. It focuses on encouraging value addition so that the country’s capacity to compete in the export markets is enhanced by reducing reliance on traditional commodities and non- tradable services.

Under the IPAP, sectors targeted for development are put into three categories each with its own outline of the sector profile, key opportunities, major constraints, key action programmes, outcomes, and mile-stones for the development of the sector. The plan has given impetus to the development of a wider range of products including Metal fabrication, capital and transport equipment sectors, automobiles, compo-nents, medium and heavy commercial vehicles and plastic, pharmaceuticals and chemicals to name a few.

More significantly, the plan is leading the country into exploring sectors that have potential for long term developing of advanced capabilities in nuclear, advanced materials and aerospace.

The Motor Industry Development programme (MIDP) which was launched in 1995 to boost the automobile industry has achieved remarkable results for the country. The results of its intervention include the set-ting up of BMW’s plant in Pretoria, General Motors US$3 billion investment for the manufacturing of the Hummer H3 for exports to Asia, Middle East Africa and Europe, Volkswagen US$3.7 billion investment to produce the Golf 5 cars for export to Asia and Australasia and Daimler- Chrysler production of the C class sedan in the country.

Harnessing natural resources: Natural resources, especially mineral resources are the bed rock of the South African economy. Currently the country is the world’s largest producer of platinum, gold and chromium and among the leading producers of diamonds. Agriculture has also been a prominent sector although

challenged by water scarcity and poor soils. Through the pursuit of appropriate policies, South Africa has demonstrated that natural resource wealth need not predestine an economy to high degrees of economic concentration. Prudent use of proceeds from mineral exports and policy emphasis on beneficiation has led to the country diversifying its economic activity to encompass automobile assembly, chemicals, machinery and fertilizers. The country’s biodiversity has been used to develop a thriving tourism industry with great potential for growing into a major employer. The SADC “Boundless Southern Africa” initiative which makes the national parks in all SADC member state a shared resource is giving South African tourism greater scope for conducting its tourist activities in the entire sub region.

Contribution of the Private sector: South Africa, compared to rest of SADC, has a relatively developed private sector which has been an active player in promoting diversification. It has shown great enterprise in pursuing new initiatives as producers of a wide range of products in different sectors and by reaching out to beyond its borders in order to grow new markets. It has shown its commitment to innovation by investing in research and development which continues to yield new product or improvements to existing products. South African Breweries, Shoprite and mining companies which have grown into large conglom-erates exemplify this spirit of enterprise.

Infrastructural development: While poor infrastructure has constrained the expansion of economic activ-ity in a number of SADC countries, South Africa’s developed infrastructure has been a positive influence in the diversification of the economy. Through Eskom, the country generates 70% of the power consumed in Southern Africa notwithstanding the power outages that are sometimes experienced in the country.

The well developed road network within the country and connecting to other countries in the region has helped it develop reasonable trade links with Botswana, Lesotho, Zimbabwe and Mozambique and beyond.

For this purpose, South Africa is active in developing infrastructure in the rest of Africa using facilities like the Pan African Development Fund. A seemingly valuable strategy for developing and maintaining infrastructure is the Public Private Partnership (PPP) model which has been legally institutionalized.

Within eight years of applying this model, the country has approved and implemented sixty infrastructure projects. The government is also seeking new initiatives for diversifying its energy source away from coal to renewable sources. It is projected that by 2020, 15% of energy source will be from renewable sources including nuclear energy.

Investment and Financing capability: A strong driver of diversification in South Africa has been its well developed financial sector. The country’s financial institutions offer a variety of financial instruments including short term, medium and long term financing. The Development Bank of Southern Africa is an active player in long term project financing while the commercial banks are liquid and competitive. The capital market is the largest and most liquid on the African continent. The financial sector also has well developed links with international financial institutions which makes it possible for promoters of business ventures to access finance beyond the capacity of local institutions.

Education and skills levels: Over the years, the country has developed strong human resource capability in engineering, ICT, the service sector and energy which has provided the basis for sustaining new and

emerging sectors. Limited skills in the area of nuclear energy are considered as one reason that is limiting the diversification of sources of energy into new forms like nuclear energy.

Access to regional and international markets: South Africa is the most significant player in both the SACU and SADC markets in which it controls 93.3% of total SACU trade and 71% of the GDP of SADC. Access for its goods and services in these two regional groupings is basically unchallenged. For this reason South Africa has become a key player in driving the economy of the Southern Africa sub region. More importantly, South Africa is the country in the sub region which is most integrated into the global economy. Its major trading partners are China, the United States of America, Japan and the EU. To expand international trade, South Africa has established economic trade agreements with EU, USA, and is in the process of expanding relations with India and Brazil as well as China. It is also these trade agreements that have helped diversify South Africa’s export market beyond what any member state of SADC has been able to achieve.

2.2.2 Mauritius

Mauritius has one of the most diversified economies in the sub region. It terms of the diversification coef-ficients shown in table 1, the country is the fifth most diversified economy after South Africa. Both Table 4 and Figure 15 confirm that the country’s economy continues to diversify in contrast to countries like Swaziland which show signs of becoming less diversified. Sectors making significant contributions to the country’s GDP include finance and real estate, manufacturing, trade, transport and communication. It has a relatively moderate export product concentration with textiles, the main export product, contribut-ing 15% to total exports and raw sugar, the second most important export product, contributcontribut-ing 14.2%

to total exports. This means that the top two export products account for nearly 30% of the country’s exports. However, 29 export products account for 75% of the country’s total exports. In terms of market concentration, the United Kingdom which is the first export market partner takes up 25% of its exports while France, the second export partner takes up nearly 17% of the country’s exports. Again the country shows a moderate export market concentration since the top two export partners between them take up 32% of the country’s total exports.

At independence in 1968, Mauritius was an agricultural based economy concentrated on the production and processing of sugar cane. It is has since then developed from a low-income country to an upper-middle income country with its economy diversified into the textile industry, tourism, and financial services.

Sugar still commands an important place in the life of the country. It takes up nearly 90% of all cultivated land and contributes nearly 15% to the country’s export earnings. However, it is not the single important commodity it once was as subsequent developments have transformed Mauritius into a fairly diversified economy within Southern Africa. As evidence of its transformation, Mauritius’ share of agriculture in real GDP has declined from around 12% in 1990 to around 6%. The services sector, made up largely of tourism and financial services, is the most important in the economy contributing 74% of real GDP.

The export of services makes up more than one third of total foreign exchange earnings, with tourism being the major contributor. Manufacturing, of which textiles and clothing make up more than 40% 0f the output, is responsible for about 75% of merchandise exports and about one fifth of real GDP. For a country which

does not have the natural resource endowments that many African countries have, its path to diversifica-tion makes a strong case for the role of appropriate policies and government commitment in transforming an economy. The current level of diversification, accordingly, is the end result of policy management and implementation of strategies by successive governments over the last forty years as outlined below.

Import substitution strategy: At independence the Government of Mauritius inherited an Import-Substi-tuting Industrialisation (ISI) strategy. The focus of the strategy was to encourage manufacturing activities in the economy which promoted import-replacement. Supportive legislation was passed in 1964 which in-troduced a number of fiscal and other incentives to encourage the setting up of ISI industries. Companies or Industries set up under this legislation were designated D.C. companies because they were issued with what was called “Development Certificates”. The privilege associated with being a D.C. company was protection from external competition through the imposition of tariff and non-tariff barriers on competing imports.

At independence the new government realized that the ISI strategy was failing to create employment and did not seem to be the appropriate strategy on which the country could develop. It, therefore, resolved to abandon ISI in favour of the Export Oriented Industrialization (EOI) strategy. But the import substitu-tion strategy initiated the country’s vertical diversificasubstitu-tion process in the form of sugar cane processing.

Export oriented industrialization strategy:

This strategy shifted focus from producing import substitutes to producing for the export market. But apart from the sugar industry, the government did not have much to start with in order to pursue the export industrialization strategy. The country, as noted lacked natural resources on which industrialization could be built. It was also geographically remote from sources of raw materials and possible foreign markets.

Management and technical skills were generally absent outside the sugar industry and capital investment was scarce. The country was faced with a host of constraints which from the outset made it difficult to achieve the desired industrialization and economic diversification.

In the 1970s government identified the textile and clothing manufacturing sector as the driving force around which the development of an export-oriented strategy could be built. It set out to attract foreign investment into this sector by offering a package of incentives which included tax holidays and duty-free importation of raw materials and equipment and free repatriation of capital. The country was subsequently designated as an Export Processing Zone, or a Free Zone with the passing of the Zone Export Processing Zone (EPZ) Act No.51 of 1970 under which it offered an expanded range of incentives to both foreign and local investors including:

• Complete exemption from the payment of import duties on productive machinery, equipment and spare parts.

• Complete exemption from payment of import and excise duties on raw materials and components except spirits, motor-cars and petroleum products.

• Exemption from payment of income tax on dividends and profits for the first ten years of operation and favourable corporate tax rate.

• Availing factory buildings and fully-serviced land at reasonable or subsidized rates.

• Subsidized electricity or water rates

• Favourable labour laws. 

• Guarantee against nationalization.

• Free repatriation of capital (except capital appreciation), profits and dividends.

• Availing permanent residence and work permits for foreign technicians and managers.

The EPZ sector emerged as the major driving force in attracting investors into the textile industry and helped to establish manufacturing companies across the whole country. It stimulated the country’s export performance into becoming the leading factor in growing the economy. More significantly it formed the basis for the country’s impressive annual real GDP growth rates averaging 5.4% between 1976 and 1990, making it one of the most consistent performers in Africa. The EPZ sector, itself, grew at an average an-nual rate of 16% between 1976 and 1990 but peaked in 1986 when it grew at 35% in 1986. To ensure further

The EPZ sector emerged as the major driving force in attracting investors into the textile industry and helped to establish manufacturing companies across the whole country. It stimulated the country’s export performance into becoming the leading factor in growing the economy. More significantly it formed the basis for the country’s impressive annual real GDP growth rates averaging 5.4% between 1976 and 1990, making it one of the most consistent performers in Africa. The EPZ sector, itself, grew at an average an-nual rate of 16% between 1976 and 1990 but peaked in 1986 when it grew at 35% in 1986. To ensure further